Mood cautiously optimistic in relation to economy and restrictions

Equity markets are higher today as Germany has become the latest European country to set out plans to gradually re-open some aspects of its economy.

Europe

Certain businesses will resume trading next week, and schools will re-open next month. Austria, Spain and Italy have all eased restrictions recently and there is a slight sense that countries have a better handle on the situation.

Barratt Developments expects business to be ‘very limited’ given their sales centres and construction sites are closed on account of the health emergency. Last month, the company revealed plans that were aimed at conserving funds, which including cancelling the interim dividend, postponing all non-essential capital expenditure, introducing a hiring freeze, plus suspending all land purchases. The house builder has taken further steps to tighten its belt. Roughly 85% of staff will be furloughed until at least the end of May, and senior management will take a 20% pay cut until work restarts. In terms of financing, Barratt are in a strong position as it has £450 million in cash, and it has access to £900 million in credit. In addition to that, the firm is looking into the government lending scheme too.

Rentokil shares are in demand today after the company released positive first-quarter results. Ongoing revenue increased by 7.2% in the three month period. The group provides pest control and hygiene services, and in most countries it operates in, those services has been largely designated as essential. On the other hand, there has been disruption to its business because of the various lockdowns. Italy has tough restrictions, so the group saw revenue in March fall by 15.3%, while it dropped by 5.7% in the quarter. On a more positive note, the unit in Hong Kong unit saw revenue increase by 34.5% in the quarter. Whenever things go back to normal, the group’s services are likely to be in high demand. Last month, the company earmarked £100 million for cost cutting. The programme will include pay cuts for senior management, and the cancelling of the first half bonus scheme. In addition to that, the CEO will take a cut pay cut of 35% in the second quarter, plus the remaining 65% will be donated to a new employee support fund.

Petrofac received a termination notice for two contracts it recently signed. The cancellation came from the Abu Dhabi National Oil Company in relation to the Dalma Gas Development project. The contracts were worth $1.65 billion, of which Petrofac’s portion was worth $1.5 billion. In light of the turbulence in the energy market the cancellation isn’t a shock. The share price has fallen close to the March lows.

M&G and St James’s Place shares are in the red as the companies have gone ex-dividend.

EasyJet shares are now in the red, but they enjoyed a decent rally in the morning. The company said it expects the first half loss before tax to be £185-£205 million, which would be an improvement on the £275 million loss that was posted in the same period last year. The Covid-19 crisis prompted the airline to ground its entire fleet, but thanks to costing cutting measures and financing schemes, the company can survive, even if all its aircrafts remain out of commission for nine months. If the firm’s six month loss is going to be an improvement on last year’s figure, it shows you how well the firm was performing before the pandemic struck. The vast majority of easyJet’s staff have been put on furlough for April and May, all non-essential maintenance has been postponed, and the group is not incurring any marketing or advertising costs. Last week, it was announced the company will defer on the delivery of 24 aircrafts between now and 2022, and that has greatly helped with the liquidity position. Roughly £400 million was raised through two loans, so that will give the company some breathing space. Not surprisingly, easyJet didn’t offer a guidance.

US

The Dow Jones is slightly in the red on the back of the jobs data. The weekly jobless claims report came in at 5.24 million, Reuters were expecting the reading to be 5.1 million, while the Bloomberg survey was for 5.5 million. Keep in mind last week’s reading was revised up slightly to 6.61 million, so there was a drop-off in the rate of new claims. In the past four weeks, in excess of 22 million people have registered for unemployment benefit. The impact of the coronavirus was seen in the Philly Fed report for April too, as the reading was -56.6. In March, housing starts tumbled by over 22%, while building permits fell by 6.8%. If last month’s readings were poor, one wonders how bad the April figures will be.

It was reported the Small Business Administration Paycheque Protection Programme has run out of money as it has used up its $350 billion allocation – helping out 1.6 million companies. It sounds scary, but at least firms are availing of the service, so that should cushion the blow to the economy.

Later on President Trump is expected to give an update about the guidelines relating to the lockdowns. The US leader said that some states could see restrictions before 1 May.

Morgan Stanley revealed it’s first quarter numbers today. The bank took a hit of $610 million on loans that it has up for sale, and it made a provision for loan losses of $388 million. In the three month period, earnings fell by 30%. EPS were $1.01, undershooting the $1.14 forecast. Revenue cooled to $9.49 billion, missing the consensus estimate of $9.73 billion. Keeping in step with other big banks, Morgan Stanley’s trading division performed well thanks to the surge in volatility brought about by the health crisis, but the firm cautioned that if volatility fades in the quarters ahead, the dealing revenue might dry up.

Neel Kashkari, the head of the Federal Reserve Bank of Minneapolis, said banks should raise $200 billion in capital now. The central banker clearly feels that banks should beef up their balance now, as the rate of loan defaults in the quarters ahead are likely to be colossal. This week, the major US banks, JPMorgan, Citigroup, Wells Fargo, Goldman Sachs, Bank of America and Morgan Stanley, collectively put aside over $25 billion for bad loan provisions. When it comes to liquidity, it’s far better to have too much than not enough, so it might be prudent to raise funds now, in case the default rate spirals out of control.

Blackrock is a titan in the fund management world, and the company blamed the pandemic for the 23% fall in first quarter profit. The company said it’s clients scrambled to withdraw their funds due to the violent swings in the markets because of the Covid-19 emergency. Assets under management stood at $6.47 trillion at the end of the quarter, which was a big drop off from the $7.43 trillion one year ago. When calm returns to the markets, the firms might see assets under management tick up.

FX

The US dollar index is up on the day as it continues to build on yesterday’s gains. The greenback edged lower in advance of the US jobless claims report, and it managed to move higher in the wake of the dreadful reading. The upward move in the US has pushed EUR/USD and GBP/USD into the red. The Australian dollar suffered greatly yesterday, but it has only pulled back a tiny amount of the ground it lost, which suggests that confidence in the currency remains low. The positive move in the oil market had helped the Canadian dollar and the Norwegian Krone

Commodities

Gold is showing modest gains today as the metal has recouped some of the ground it lost yesterday. The move higher in the US dollar and the optimism in global equites hasn’t hurt gold today. Earlier in the week, the commodity hit is highest level since late 2012, and it seems the bullish trend has resumed. Further gains from here might see it target $1,800.

Oil has rebounded from the heavy losses it endured yesterday – at one point WTI fell to a level last seen in 2002. It would seem that shorting covering combined with bargain hunting has lifted the energy market today, but demand woes are likely to loom over the commodity for some time to come. Yesterday’s EIA inventory update was very high – it painted a picture of weak demand. US oil storage facilities are running low on capacity, and it was reported the government is considering paying shale firms not to produce oil.

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